Problems of Post-conflict society... Bosnia by Fikret Hadzic

PROBLEMS OF POST-CONFLICT SOCIETY ON IT’S PATH TOWARDS SUSTAINABLE DEVELOPMENT: LESSONS FROM BOSNIA AND HERZEGOVINA ABSTRACT After the completion of aggression on Bosnia and Herzegovina

PROBLEMS OF POST-CONFLICT SOCIETY ON IT’S PATH TOWARDS SUSTAINABLE DEVELOPMENT: LESSONS

FROM BOSNIA AND HERZEGOVINA

ABSTRACT

After the completion of aggression on Bosnia and Herzegovina (BiH), theinternational society (led by countries of European Union and USA) has realized theproject of its' restoration and reconstruction It is estimated that 10-12 billion USdollars were spent in this project from 1995 to 2000 Such high investments in such ashort time interval were supposed to have as a result BiH established as on theposition of sustainable and stable development However, accomplished tasks clearlyoutline the inefficiency of the international community in enactment of theaforementioned project It is estimated that only 40% to 50% of donated funds haveactually reached final users The rest was spent by foreigners with the goal of

«financing the costs of donation», or costs of their implementation

Analyses of the effects that development programs had, conducted by local andforeign experts, imply us to conclude that BiH today is more closer to high-degreefinancial dependence rather than self-sustainability According to some socio-economic indicators (the level of poverty, employment rate, etc.) the present situation

is even more unfavorable than situation immediately after the end of war Also, wemustn't neglect the fact that during the mentioned period, BiH was practically under

«protectorate» of international community

The article will also deal with the analysis of the effects of internationalcommunity in realization of projects of reconstruction of BiH society and especially

of its' economy We will also discuss overlaps of international community and localauthorities in realization of this complex project The achieved level of socialdevelopment will be presented in brief outlines, which will mostly cover the presentsituation, but special attention will be paid to problems and obstacles on the pathtowards sustainable development We will also briefly demonstrate the segments inwhich significant improvement was accomplished and which represent a goodfoundation for future development At the end, we will give an estimate of our presentposition and perspective of Islamic banking in the context of financing thedevelopment of BiH

BiH represents a specific and complex case In relatively short period, it was facedwith the need for realization of triple transition BiH is one of few countries in theworld, which has received a significant foreign funding in short time Theinternational community, as an implementing agency, had serious flaws in their work.Local authorities as well We are aware that some of the statements and opinions aregiven without some extensive elaboration (which was maybe desirable) The reason

 Faculty of Economics, Sarajevo University, 118, Lukavicka cesta Str., Sarajevo, Bosnia and Herzegovina.

lies in an author's attempt to stimulate thinking about different topics they write about.The goal is not to look for the guilty ones, but to improve the system and preventpossible new mistakes In spite of all limitations, we hope that BiH experienceelaborated in this work will help both providers and users of foreign assistance, inavoiding mistakes and in accomplishing the best use out of received donations, allwith the goal of achievement the preconditions for sustainable economic and socialgrowth All eventual comments and remarks are welcome.

1 INTRODUCTION

During the aggression on BiH, which lasted from April 1992 till December 1995,enormous human and material casualties were incurred The estimates indicate that258.000 people were killed or are missing, which is 5,9% of the population of BiHbefore the war1 More than half of those that were killed or are filed as missing wereBosnians (56,7%), more than a quarter a Serbs (26,8), Croats 11,5 and the rest 5%.Approximately half of the population from 19912 were forced out of their homes ormoved The number of refugees has exceeded the figure of 1,2 million, half of which

do not intend to return to country The rest will potentially return, but this process issignificantly delayed Today it is clear that the aggression on BiH had a genocidecharacter with basic goal of elimination of Bosnian and Croat population from theterritories on which they lived That was an attempt to destroy the multi-religionnature of Bosnian society, which was to be connected with «ethnically cleansed»3territories of neighboring countries Direct and indirect material damages and losseswere estimated to be 100 billion US dollars Non-material damages are far greater It

is perfectly clear that the international society could have stopped the aggression onBiH and reduced the damage and costs that were thereby created Why they failed to

do so will remain a topic for historical investigations and political debates

2 BOSNIA AND HERZEGOVINA BEFORE THE AGGRESSION

Prior to 1992, BiH was, according to all criteria, an averagely developed Europeancountry, with GNP 2450 US$ per capita It was the only one of the republics offormer Yugoslavia that had suffice in foreign trading in the amount close to half abillion US$ However, on the basis of subsequent analysis, it was determined thatrelatively high standard was more a consequence of financial indebtedness abroadthan a reflection of actual strength of local economy BiH was even then facing someserious transitional reforms Aggression that followed has postponed that process andmade it even more complex

3 AGGRESSION – WHAT IS THE PRICE OF WAR?

On the basis of study conducted by The Open Society Fund BiH4, the costs ofinternational community5 for stopping the war, repair of its' consequences,establishment of peace, restoration and reconstruction of BiH were estimated to rangefrom 71 to 81 billion US$ Those were subdivided into several categories of expenses:

Table 1 Total estimation of war costs in BiH

In billions of US$Costs during war period (1992-1995)

Costs during period of peace process (1995-2000)

Humanitarian aid in country with development of preconditions for return of

refugees

7–8

Costs of peace keeping operations (military and civilian component) 17-19

Costs of direct donations and different forms of direct assistance from Islamic

According to this report, total costs of international community as a directconsequence of the aggression, during period 1992-2000 were between 81 and 92billion US$ If we add to these expenses estimated value of direct and indirectmaterial damages that BiH has suffered, than the amount of these expenses rises up to

181 or 192 billion US$ For comparison purposes, these costs represent 17-year GDP

of BiH from 1990, or 40-year GDP of BiH from 2000 After reviewing theseestimates, it is obvious that we are speaking about enormous expenses that could havebeen avoided had international community stopped the aggression on BiH in due time.Can we imagine what would have happened if those funds were invested in thecountry's development, development of the region or support in the struggle againstpoverty in the world Can we call these actions taken by international community,economically rational?

4 TRANSITION – A DILEMMA: RECONSTRUCTION OR A CHANGE

After completion of the aggression, BiH was faced with a triple transition: fromwar to peace, from primary substantial international donation to sustainabledevelopment and from planed economy and single party system towards free marketeconomy and democracy However, the most important transition was to take place inthe heads of the people It is believed that «the key element for transfer to self-sustainability of the society and its development is the change in minds and ways ofthinking among leaders and the population»6 In that case, we shouldn’t be talkingabout «restoration and reconstruction» but about «change» in the consciousnessamong people who spent years building the feeling of «dependence» on the state,which was supposed to solve all their problems After the aggression, even moredangerous syndrome appeared, which is manifested in the feeling of «dependence» onactivities of international community, that is on help coming from abroad Such

attitude threatens to take the country definitely towards «dependent» instead ofsustainable development

Donor help

For projects of urgent repair and reconstruction, value of which was estimated to

be close to 40 billion US$ by the BiH Government in 1996, only 5,3 billion US$ wereprocured, which represents a little bit more than 13% The structure of promiseddonor help from the five donor conferences is given in table 2

Table 2 Commitments at BiH Donor Conferences

Turkey, France, Austria, Finland, Greece,

Malaysia, Denmark, Slovenia, Belgium, Kuwait,

Czech Republic, Ireland, Yugoslavia

Source: Government of the Federation of BiH, Coordinating Board for Development and Reconstruction

Only official information on donor help that was promised on donor conferences islisted here, what doesn't mean that the actual help was not significantly greater Part

of the help, especially from Islamic countries is realized through direct bilateralarrangements For example, The High Commission of Saudi Arabia donates to BiH

annually around 60 million US$, whereas the value of projects financed by theIslamic Development Bank, in the period 1995 – 2000, has almost reached the figure

of 20 million US$ Here, we shouldn't forget the help provided by numerous NGOs,over 600 of which were active in BiH

Most of the donated help was directed towards reconstruction of destroyed ordamaged infrastructure, and only small part was spent to support business sector, startthe production and employment

Growth of economic activities followed by stagnation

Besides supporting repair of infrastructure (power supply, transport and watersupply) and support of business sector, the international community has allocatedfunds in the amount of 1,2 billion US$ for projects such as: housing, support to socialsecurity, education, agriculture, development of state institutions and servicing ofexternal debt Great amount of help has brought about initiation and intensification ofoverall business activities in the country Annual rate of realistic increase in GDP was36,6% in 1997, and 9,9% in 1998 and 1999, and 5,9% and 5,6% in 2000 and 2001,respectively8 The estimates of IMF indicate the continual decline of realistic GDP inthe coming years Therefore, after the period of dynamic growth, there comes a phase

of stagnation of realistic GDP It is mostly caused by the reduction of financial helpcoming from the international community, insufficient degree of development of localeconomy, low level of direct foreign investments, and the influence of global worldrecession on BiH It is obvious that local economy, which was supported by theinternational community for six years, is still to weak to handle the burden of futuredynamic development by itself The economy of the country today is mostlycomposed of medium sized companies that are still incapable of dealing with thetough international competition, both on foreign and local market On the other side,due to slow privatization process, and lack of finances and foreign investors,restructuring of privatized enterprises has not commenced yet

Effects of foreign aid

Donor aid had significant effects on all segments of BiH society Its' economicinfluence is especially pronounced in the part of contributions to economic growth,employment, fiscal sustainability and payment transactions The influence oneconomic growth was two-fold:

• direct: through influence of realization of financed projects on

consumption, savings, staff payments and employment, and

• indirect: through received technical assistance with the goal of promotion

of economic reforms, inflow of direct foreign investments andimprovement of total economic activities with creation of preconditions forsustainable development

The annual rate of increase in GDP in the first year after the war (1997) was inexcess of 36% If it weren’t for the donor help, BiH would have a negative rate of

increase in GDP, which would be minus one (-1%) Only in year 2000, 3,2 billionUS$ were spent in military and civilian sector Of the entire budget for purchase ofgoods and services in BiH, 736 million US$, or 23%, were spent That comprised17,8% of annual GDP in BiH in year 200010

Especially interesting are the estimates of the effects this help had on localconsumption and employment

Table 3 Summary International Community (IC) Projects Data (Year 2000)

Source: USAID: International Community Downsizing in B&H, Assessment of Macroeconomic

mpact, Sarajevo, November, 2001, p 4.

According to information from table 3, the military part of the budget was almostfour times higher than the civilian, and it comprised 78,9% of the total budget ofinternational community in year 2000 Only a little bit more than one third (34%) ofthe total budget of international community has actually entered BiH As for theemployees, 28,8% were local staff and 71,2% were internationals In the civilian part

of the project, this ratio was more favorable and it amounted to two thirds We need toremind here that the local staff was mostly used for logistic support of internationalstaff in realization of projects, so their earnings were commensurate to their workengagement

Staff salaries in infrastructure projects were 11%, and in projects of provision oftechnical assistance up to 80% On average, salaries participated in the total projectcosts up to 28%, in civilian projects 45% and in military projects 23% National staffemployed in IC projects had salaries three or four times higher than employees inlocal firms or agencies Besides, these employees were exempted from paying anylocal taxes or contributions, which increased their income even more Internationalstaff, employed on implementation of projects in BiH was extremely well paid11 Theinformation on revenues of international staff was ordinarily unavailable to public.The international civilian staff spent 34% of their revenues in BiH, and internationalmilitary spent only 25%12

According to the aforementioned United States Agency for InternationalDevelopment (USAID) study, the effects of international help on fiscal system wereestimated to be around 222 million US$ (13%) of total budgetary revenues for 2000

We believe this to be an overestimate, because goods and services for such projectswere usually exempted from taxes, customs and other duties, and local staff employed

in international organizations was not required to pay local taxes and contributions topersonal earnings, nor pension and health care security

The effect of this help on the balance of current transactions which was manifestedthrough direct import financing of products and services for infrastructurerehabilitation and other means was estimated at 332 million US$, which is equivalent

to 8% of GDP in 2000

At the end we can conclude that the effects of international help in all aspects ofpeace keeping, repair and reconstruction in BiH, were not adequate to funds invested.The costs of international community were enormously high, and the effects on BiHdevelopment as compared with the funds invested, were rather modest Namely, «thequestion that needs to be answered is what caused the situation in which the country isfully dependent on international help, after receiving it for five years In other words,this help has not prepared a country for sustainable development»13 Or, as said byentrepreneurs, «the implemented projects did not give satisfactory results, nor werethey in accordance with actual developmental needs in BiH»14

This practically confirms the thesis outlined in the study of Professor Chapra whosays » the irony is that a substantial part of foreign aid is not used ultimately toincrease the rate of capital accumulation and growth; it is used to finance privateconsumption, recurrent public expenditure, and the purchase of military hardware»15

5 CAUSES OR CONSEQUENCES

The price of capital

After peace was established, BiH economy was faced with a chronic lack ofcapital Undeveloped local commercial banks, as well as high risks of distribution offunds, had as a consequence extremely expensive capital available for companies atthe local market The interest rates on borrowed funds were very high and they rangedfrom 2% to 4% per month Companies or entrepreneurs who borrowed these fundsunder such circumstances had problems servicing their debts Great number of thosethat used these funds for initiation of production would end up in bankruptcy, because

of the burden of these debts Some, however, used the funds to expand business in thegray or black market, and they would ordinarily experience a sudden expansion

The capital price of international developmental organizations (World Bank andUSAID) was much more favorable, but was still too high and unfavorable for seriousbusiness production actions16 The presence of international financial institutions didnot have a significant effect on reduction of high interest rates of local commercialbanks

The end of «large ones» and development of small ones

Before the war, BiH had several large companies that were recognizable on foreignmarkets, where they were awarded contracts, and were competitive to even large

multinational companies Those companies were successful in the developingmarkets, and especially markets of those countries with which former Yugoslavia hadspecial relations They would appear on the world market usually as consortium,together with complementary companies of other republics of former Yugoslavia.War, destruction and isolation have caused partial or total collapse of theaforementioned companies They suffered three extensive «hits»: «brain drain», loss

of markets and loss of relations with complementary companies from states createdthrough dissolution of former Yugoslavia They also had an unfavorable structurewith state as the dominant owner The approach of the international community wasclear – do not start with their restructuring, that is, withhold the financial support tostate-owned enterprises Today it is believed that some of them, in a short or mediumterm could have re-established their production, or establish a new one, and evenappear at the world market As a proof of this point we can use several large state-owned companies who, supported by the foreign loans, have accomplished quite goodbusiness results (bakeries, pharmaceutical companies, power supply companies, etc.).The goal of the international community was quick ownership transformation andprivatization of state-owned enterprises, which, according to their opinion, could nothave been realized if those companies were to re-establish production and export Inthat way, once respectable companies were left to themselves until their collapse, and

on their ruins, seed of micro, small and medium sized enterprises was planted (MSMEsector) Many consider such approach by the international community to be a mistake

The funds for the business sector were mostly directed towards support ofdevelopment MSME sector Such concept did not achieve expected results in theemployment sphere or development of export production Trade and constructioncompanies, first ones because of enormous and uncontrolled import, and the latterbecause of infrastructure reconstruction projects and housing achieved a dynamicdevelopment

Privatization

The representatives of the international community have helped in creation of theprivatization model, which practically represented implementation of the modelrealized by international community in some countries of Central and Eastern Europe

In this case, not enough attention has been given to specificities of BiH as a conflict society A so-called model of large-scale privatization has been adopted, andcitizens were given certificates on different grounds with which they could haveparticipated in the privatization process The citizens were allowed to invest theircertificates directly in purchase of enterprises, or in privatization investment funds, oruse them for purchase of their apartments The value of certificates was extremely lowfrom the beginning Their price on the black market ranged from 2% to 8% of theirnominal value The workers and management had no discounts in privatization, that

post-is, purchase of «their» companies That caused a lack of trust among employees andpopulation as a whole, in privatization process Due to complicated procedures andfrequents changes of laws and accompanying regulations, the privatization processstarted to demonstrate a significant delay By the end of 2001, four years afterenactment, only one fourth of the scheduled state capital has been privatized Public

enterprises and large state companies with highest value of capital, are not privatizedyet The problem that is permanently present in privatization is manifested in lack ofinterest among potential buyers from abroad, who are reluctant to participate in theprivatization of local companies.

Employment

Six years after establishment of peace, unemployment rate is rising.Unemployment is a consequence both of demobilization and privatization17 as well asslow growth of overall economic activities At the end of the first quartile of 2002,there was 595 thousand people employed, and 420 thousand people were waitingemployment on list at the Employment Bureau This makes an unemployment rate toreach 41%, which is among highest unemployment rates in Europe In the firstquartile of 2002, the number of workers employed in BiH was lower by 3081 workers

as compared with December 2001 In the same period, the number of unemployedpersons is higher by 3916 or 1,5%18 It is obvious that present economic developmenthas failed in absorbing unemployed persons, which today represents one of the largeststate problems, not only from economic but also from social-political standpoint.Public surveys also confirm our belief that the public recognizes unemployment asone of the greatest problems Almost one third of BiH population (32,8%) definesunemployment as the key problem The perception of the aforementioned problem isdifferent in different entities In the Federation BiH, in April 2002, the problem hasbeen awarded a primary significance (40,9%), whereas participants from the Republic

of Srpska thought corruption is more significant problem than unemployment (28,5%

vs 20,6%)19

Poverty

Having in mind that BiH, as a state has not yet defined the limits of socialminimum, all these analyses are based on international standards According to them,the line of existential minimum (extreme poverty) is defined by income at the level of1US$/day, and the line of poverty income at the level of 4US$/day According toconducted surveys20 in May, 2000, 30,9% of the BiH population lived below the line

of existential minimum, in May 2001, the number was 36,4% and in April 2002 thatpercentage has been significantly reduced, and was 27,5% The percentage ofhouseholds living above the poverty line was 12,7%, 7,8% and 10,4% respectively.According to surveys from April 2002, the population sees its' social situation in afollowing manner: 46,6% of participants stated they are living «below average»,10,5% of which said they are living on the «limit of existence»; 45,8% said they live

«average» and only 7,5% participants declared they live «above average» The state,poor by itself, is not capable to fulfill the needs of socially endangered andjeopardized categories of population Approximately 16,4% of the population isreceiving some sort of social aid, whereas 14,4% is receiving help from the relativesand friends living abroad21 On the basis of the aforementioned data, it is clear thatBiH is seriously faced with the problem of poverty The method of solving thisproblem represents a great challenge for BiH However, only with a sustainableeconomic development, improvement of distribution system, strengthening of social

institutions and funds, one can expect a serious progress in the task of extermination

of poverty

«Brain drain»

«Brain drain» represents one of the greatest damages incurred upon BiH duringand after the aggression Departure of great number of young intellectuals, managersand highly qualified persons from different branches represents an irreplaceable lossfor the country Only in the first two years after the aggression (1996 – 1998), it isestimated that 42.000 persons have emigrated, most of who were qualified workersand their families Many of them moved to countries of Western Europe, USA,Canada and Australia In their new countries they found a suitable work and they have

no intentions of coming back to the country This trend has slightly declined in thepast, not because of improved situation in the country, but because imposedlimitations by the Western countries The importance of this problem is demonstrated

by the results of the last surveys Enormously high percentages of young persons(62%) have expressed a desire to leave the country22 «Brain drain» represents a greatproblem, which threatens to seriously hamper the creation of suppositions forsustainable development

Foreign direct investment

Foreign direct investments (FDI) can represent a strong impetus for developmentand can be an integrating factor for the world economic operations The experiences

of numerous countries clearly show that countries, which directed FDIs into selectedbranches and areas, achieved more balanced development Having in mind that BiHdoes not yet have an integrated development strategy, nor precisely defineddevelopmental goals, direction of FDIs did not take place so far The efforts in thisarea were mostly focused on promotion of preconditions for FDI, but not towardsserious institutional transformation or formulation of specific policy towards foreigninvestors A significant problem in this area is small and poor local market, legalinstability which is in some cases undefined or incomplete, and in others too complexand complicated legislation

Table 4 Degree of registered FDIs in BiH in the period:

The level of FDIs in the period May 1994 – December 2001 is rather modest and istotally 526,8 million US$ It is indicative that in the past three years, we arewitnessing a reduction in annual level of FDI in BiH Most FDIs came from Kuwait(210 million US$ or 19% of total FDI), Croatia (144 million US$ or 14%), Germany(108 million US$ or 9,8%) and Holland (95,8 million US$ or 8,6%)23

6 FLAWS OF INTERNATIONAL COMMUNITY

Without further elaboration, in the next paragraphs we will outline some of themost often noticed mistakes or flaws of the international community in enactment ofthe support policy and implementation of stabilization or repair projects in BiH Inthis case, the emphasis will be on economic and social set, less on political actions

• The existing support policies are not adjusted to local conditions andspecificities Those that were developed for other cultural-civilizationconditions could not have provided expected results in BiH24,

• International community did not have a strategically devised plan on itsgoals in BiH There was a characteristic lack of all-encompassing visionand efficient structures for its' enactment, that is, lack of consciousness oneconomic reform being a supposition for long-term stability25,

• The excessive bureaucracy and duplication of tasks, without firmleadership, mutual coordination and cooperation, burdened internationalorganizations There were also frequent conflicts among key personnel,and classical struggle for «territory», that is, jurisdiction «Communicationamong agencies was very weak, so sometimes we were not aware that weare duplicating work»26,

• Internationals were usually employed on a short-term, with very modestrelevant experience, usually very young or close to retirement They wereasked to make important decisions27,

• In time, international organizations would forget their goals in BiH.Opinion can be made that they were the goal for themselves, creating thestructure most suitable for them The question «how to make the best forBiH» was replaced with a question «how to make the best use formyself»,28

• «Carrot and stick» strategy was used as a model of cooperation betweeninternational financial institutions (IMF and The World Bank) and localauthorities, and in time, the carrot got smaller and stick predominated Thatbrought about an increase in frustration of local authorities that desired theleast possible partnership in realization of joint projects,

• As a significant flaw, we can mention high project implementation costs,which would sometimes be as high as 50% to 60% of the total donationamounts Also, without any effect on local development, many goods andservices were acquired from the donor countries and those were reducingthe value of aid by 25%29

All these and other flaws of international community have resulted in «totalabsence of obvious improvement which would justify all the funds spent so far andhave only increased the pressure which called for reduction in budgets andprograms»30.

7 FLAWS OF LOCAL AUTHORITIES – OBSTACLES TO DEVELOPMENT

THAT NEED TO BE ELIMINATED

Besides aforementioned flaws of international community, it is clear that the «localauthorities are the most responsible for failure of international aid and supportpolicies»31 In the text, we would only like to outline some of them, which could be aserious obstacle and failure to future development

Huge and expensive administration

The signing of the Dayton Peace Accords in Dayton, that is in Paris, in December,

1995 meant cessation of war and beginning of the process of repair and reconstruction

of BiH However, administrative solutions accepted by the peace agreement will laterbecome one of the major obstacles in the entire process Namely, the Dayton PeaceAccords confirms the territory integrity of BiH as a state, but also legalizes twoentities: Federation of BiH (which functions as a separate entity in which Bosniansand Croats occupy 51% of the territory) and Republic of Srpska (as the second entity,

in which Serbs are a majority on 49% of the territory) With later arbitrary decision ofthe international community, the city of Brcko, which lies in the north of the countryand has a strategic relevance for both entities, is given a «district» status Tocomplicate this situation even further, the Federation BiH was administratively split

on ten cantons with relatively high administrative authorities, and then onmunicipalities as institutions of local authority, which exist in cantons and haverelatively small administrative authorities Created by the recipe of the internationalcommunity, BiH today is a decentralized state with 14 parliaments, 14 governments,

10 governors, approximately 180 ministries and The Presidency composed of threemembers (one from each constitutive nation), which are rotated on a periodic basis onthe position of the presiding Besides this, international community appoints its' «highrepresentative» for BiH as a protector or «ultimate authority» which enacts thedecisions of the international community This creates very complicated andexpensive administrative structure in which we constantly see conflicts betweenglobal and local, between entities and the state, entities and the canton, canton andmunicipalities, with struggle of every single element trying to preserve their part inpower or expand its' jurisdictions In this way, creative energy, which should bedirected towards development, is unnecessarily spent on settlement of conflictsbetween interests Such structure is extremely expensive for a small country like BiH,and today represents a significant obstacle and obstruction to efforts aimed atsustainable development